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Wear & tear

Updated on July 18, 2023

The term “wear and tear” refers to the decline in value that occurs naturally and gradually as a result of the ordinary use of an asset. It is an allowance provided to businesses for the purpose of calculating their profits, specifically related to assets such as buildings, plant, and machinery that experience wear and tear in the normal course of business operations.

How is wear and tear accounted?

Tax laws allow businesses to claim deductions for wear and tear which is known as depreciation on such assets. These assets can be assets used in their operations or otherwise and reduce the taxable profits. Assets are grouped into categories with specific rates and methods for calculating allowable deductions. These deductions reflect the decline in asset value over time and help businesses recover costs associated with wear and tear.

Tax Implications of Wear and Tear on tax liability

Wear and tear, or depreciation, is an expense that businesses can deduct from their income, lowering their taxable profits and reducing the amount of tax they need to pay.
Deducting wear and tear expenses improves a business’s cash flow by freeing up funds that can be reinvested or used for other expenses.
The wear and tear deduction is spread over the useful life of an asset, reflecting its gradual decline in value, and ensuring a fair and consistent tax benefit over time.
Different assets have specific rules for calculating wear and tear deductions, and businesses must keep records and follow the guidelines to support their claims.
Tax laws regarding wear and tear deductions may vary between jurisdictions, so it’s important for businesses to understand the specific rules applicable to their location.